Can You Break A Real Estate Contract

Once you have been in the real estate business long enough you can be assured you are bound to hear the question “can I get out of my real estate contract”? Buyers and sellers remorse happens all the time in our business.

When you sign a real estate contract as either a buyer or a seller, you have committed yourself to an agreement that is legally binding. Ideally, this would mean you would meet all terms of the contract and conduct the transaction as planned. But in real life, unexpected things happen, and the contract you were so happy with at the beginning may start to seem like a ball and chain that you want removed at any cost.

Fortunately, it is possible to break your contract. You just have to be prepared to deal with the consequences, whatever those happen to be.

In Massachusetts breaking a real estate contract is not so simple and there is almost always complications involved with doing so. What the ramifications are could depend on which type of real estate contract you are breaking.

Understanding The Two Types Of Massachusetts Real Estate Contracts

The state of Massachusetts has you signing two different contracts in the course of purchasing a real estate property. While the contracts are similar, they come at different stages in the process and commit you to somewhat different obligations. The contracts are known as the offer to purchase contract and the purchase and sale agreement.

When you sign the offer to purchase, you are committing to all the major terms of the real estate transaction, including how much you will pay for the property, how much you will be putting in escrow, the amount you are financing and the date by which you will procure such financing. There will also be a closing date and any other contingencies you or the seller may need.

These contingencies are acceptable reasons why you would not be able to fulfill your purchase of the home, such as if you cannot get a loan or if the inspection comes back with major issues – mold, lead paint, radon, well issues, pest issues, etc.

With the offer to purchase contract, you will probably be handing over between $500 and $1,000, money that you may be at risk of losing if you back out of the contract without a good reason – such as your contingencies.

The purchase and sale agreement is a more detailed version of your offer to purchase contract, and will usually have the same information on it as far as contingencies if they have not been completed and the basic rules of the purchase. However, it will also require you to put money in escrow to back up your offer before closing, often around 5% of the purchase price.

Breaking the real estate contract after you have put the money in escrow means you may lose that money, which can be a sizable amount depending on the price of the home. This is why it only makes sense to break the contract if you have justification. At least, if you don’t want to lose your money.

Breaking Your Contract – Buyer Perspective

250Since the buyer is the one forking over the money for the home purchase, it only makes sense that it would be the buyer that most often gets cold feet. Buyers tend to break contracts more often than sellers for many different reasons. Some of these include:

  • General home inspection issues – there are any number of issues that could come up during a home inspection. Some of them will be large and others will be small. Everyone has a different perspective and tolerance on what they consider a problem.
  • Mold – this is one of the bigger issues in real estate at the moment. Everyone is afraid of the health risks involved with having mold in a property. It is something that all home owners should be cognizant of especially when they are selling a home. You can expect that a buyer will want mold remediation to be taken care of as a condition for purchasing the home.
  • Radon – Radon is another issue that home sellers should be aware of. Most buyers are not tolerant of having radon and will want the issue to be remedied by the seller. An even bigger complication is when radon is discovered in the homes water supply. While removing radon from water can be done fairly easily, it can be an expensive proposition. Usually in the ballpark of $4000-$6000 for remediation.
  • Foundation issues – Problems with a foundation are usually not something you take lightly when they are structural in nature. The keyword being structural.
  • Roofing issues – The roof is a major component in a home and most buyers expect that it will be free of water penetration at the very minimum. Roofs can also need repair or replacement before their life expectancy is up. This is where a qualified inspector comes in handy determine when the roof will need replacement.

If you are the buyer and you find out that there is something wrong with the home – something you will most likely need to fix later at your own expense – it is understandable that you would hesitate on making the purchase. Fortunately, your contract will likely have a number of contingencies that will allow you to back out of the purchase without losing anything, as long as the reason is based on one of the contingencies.

For example, if the house has a bad mold problem, and your contract has mold as a contingency, you can end the purchase fairly easily. This is why we stress to home sellers all the time the importance of getting ready for the buyers home inspection. If more sellers just took the time to walk around the inside and outside of their homes looking for problems, it would prevent many sales from falling apart.

You may wind up in a situation where you need to cancel the contract for reasons that are not listed in the contract. If you find yourself in this dilemma, you will, need to think hard about whether it is worth it to end the contract. You will lose money and you may put yourself at risk of being sued by the seller for damages, although this does not happen very often.

Generally speaking the standard purchase and sale will often include language that says forfeiture of the deposit shall be seller’s sole and exclusive remedy at law and in equity. In other words, the seller cannot sue the buyer for damages stemming from not proceeding with the sale. Keeping the buyers deposit would be the only means of compensation.

Breaking Your Contract – Seller Perspective

250Although it is less common, there are times when a seller wishes to terminate a real estate contract. If you find yourself in this situation, you should be aware that the contract you signed is legally binding on your end as well. You could run into financial and legal troubles if you back out. You could even wind up being forced to sell your home if the buyer sues you for performance.

Your first step if you want to break the contract as a seller is to discuss the situation with your real estate agent. Your agent can help you understand your options and may be able to smooth the way for breaking the contract. You will need to be ready to give back the escrow money – quite possibly with interest – to the buyer.

In your negotiations with the buyer you may also be forced to concede a number of other things, including expenses incurred by the buyer, like inspection costs, attorney expenses, etc. You may also have to pay for interim housing if the buyer has already sold his or her home in expectation of moving into yours. This is a common concurrence in real estate when someone is buying and selling a property at the same time. Just put yourself in the buyers shoes for a moment if they have closed on or will be on their current home and have no where to go.

One other possible complication is if the interest rate has gone up from the time they locked their rate to when you are asking out. If this happens, you may have to buy down their mortgage rate as well.

There are always costs associated with breaking a business contract, and a real estate contract is no exception. Whether you are buying or selling, you should be aware of these costs before you sign and certainly before you attempt to break the contract.

There are a number of sellers that don’t understand the legality of what they are signing. Most contracts are legal and binding. While getting cold feet as a seller could be devastating, you can’t just expect that a buyer who has committed to buying your home is just going to roll over and say OK no problem. Life is usually not that easy.

Without a doubt if you find yourself in a position that you no longer want to sell your home be prepared to beg for mercy from the buyer. They do not have to let you out of the contract. I repeat they are under no obligation to free you from the sale!

A buyer suing you for performance will more than likely win. There are very few cases that a seller is going to win if the buyer has met all of their legal obligations in the contract.

Breaking a Contract With Your Real Estate Agent

250One of the things I get asked quite often is how can I fire my real estate agent? As a matter of fact a seller looking to break a contract with a real estate agent is probably far more likely than the above scenarios. Like anything else Realtors and home sellers often sign a contract that spells out an agreement between the parties. This is what is referred to as a real estate listing contract. The terms of the contract usually include the names of the parties including the real estate company, the asking price of the home, the commission due the real estate company or companies and the length of time the contract lasts.

Often times homeowners get themselves into trouble because they do not do proper research on the agent they have decided to hire. After a few months of working with the agent they may come to the conclusion they have made a big mistake. There are a number of reasons why this can happen and it is usually performance based. Some of the biggest complaints against Real Estate agents is the following:

  • A lack of regular communication. Clients deserve to know what is going on with their home sale. Many real estate agents are very lax about regular communication. This can become a big problem for a home seller who wants to be informed and rightfully so.
  • A willful misrepresentation of the market value of the home. Believe it or not there are numerous real estate agents that inflate values for the sole purpose of obtaining a listing. It is human nature for all of us to believe our homes are worth more than what the neighbors just got. Unscrupulous Realtors know this and use this as a strategy for obtaining the listing. Of course this is also a mistake on the sellers part if they are naive enough to believe it. Real Estate data never lies – people do!
  • Lack of marketing including the internet, quality photography, and proper quality brochures. There are some real estate agents that will try to get away with doing the bare minimum. I refer to these agents as “post and pray”. They put a sign in the yard, put it in the multiple listing service (MLS) and pray. This is not the kind of agent you want!

There are a myriad of other reasons why you may want to fire your real estate agent besides these three most common ones. Again, like any other contract you need to figure out what the ramifications are of doing so. I discuss this at length in the comprehensive article above about firing a Realtor. Take a look and read it as you will see the best way possible on how to get out of a contract you no longer want to be in.

Keep in mind that breaking a real estate contract is a big legal step. You should always consult and attorney before attempting to do so. Good legal advice is always a prudent move especially when you are dealing with a lot of money.

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